NEDBANK CAPITAl - Nedbank Group Limited

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OVERVIEW− Reducing the minimum target ratio; maintaining globalcomparability of calculations, but modifying for SouthAfrica’s structural issues.− Adjusting for South Africa not being aligned with otherjurisdictions in terms of deposit insurance schemes.− Clarifying whether cash reserves and liquid assets will beallowed to qualify as part of the stock of highly liquidassets. Currently only 25% of liquid assets and 0% of cashreserves qualify (the Basel paper suggests that 100% ofsovereign paper and 100% of cash reserves could qualify).− The closed nature of SA money markets, mainly resultingfrom exchange controls, which means that rands are more‘sticky’ for SA banks in the rand system than for euro- ordollar-denominated banks in their respective systems thatare more open.− SA asset managers having four large banks for depositingfunds. In Europe and the United States there aresignificantly more major banks for depositing funds,meaning wholesale funding is less ‘sticky’ compared withSouth Africa.− Given that liquidity risk is a consequential risk, legislationsuch as the National Credit Act (NCA) reduces systemicrisk and so the need for oversized liquidity buffers. Manydeveloped economies do not have the safety net of NCAtypelegislation yet.These are some of the SA structural issues that we anticipateare likely to be addressed collectively by government, SARBand the financial services industry for SA banks practically toalign with the proposed liquidity ratios.• On the banking industry systemic risk proposals, further workis ongoing on the proposals by the Basel Committee, but inSouth Africa a unique Pillar 2(a) 1,5% and Pillar 2(b) add-on,additional to the minimum Basel II 8% ratio requirement, arealready in place.As regards the emphasis on risk-based remuneration practices,Nedbank Group is positioned very well and has only a fewminor gaps to close given our risk-based approach alreadyimplemented in recent years (see the Remuneration Report inthis annual report).In summary Nedbank Group recognises that to becomeworldclass at managing risk is a journey, not a destination.We believe we have made excellent progress over the pastfive years and that overall our risk, capital and balance sheetmanagement, and ICAAP, align closely with best practice. Thispositioned the group to be resilient through the global financialcrisis and local economic recession. However, there is alwaysroom for improvement, and as the bar has been raised with thenew international regulatory proposals, we will continue withour endeavours strongly focused on continuously enhancingthe group’s risk, capital and balance sheet managementprocesses and systems.Key internal developments in 2009The following is a summary of key enhancements made toNedbank Group’s Internal Capital Adequacy AssessmentProcess (ICAAP) during 2009:• Significantly strengthened capital adequacy ratios, onthe back of our Risk-weighted Asset Capital OptimisationProgramme, and set higher target capital adequacy ratioranges.• Significantly strengthened liquidity buffers and lengthenedthe funding profile, including the successful R5,4 billionsenior-debt issue in September 2009.• Introduced more conservatism into the group’s economiccapital framework that is used for ICAAP:− Increased the target debt solvency standard from A-(99,9%) (the same as Basel II) to A (99,93%). This alignswith the targeted standard of our parent company, OldMutual plc.− Refined the definition of ‘available financial resources’ tocover the economic capital requirements.o The ‘50% of next year’s earnings’ are no longer included(even though business risk economic capital is stillincluded).o A Tier A and Tier B category were created, withTier A to cover at least the minimum economic capitalrequirements at the new, more conservative A rating.DefinitionsTier A = core Tier 1 regulatory capital and qualifyingreserves*Tier B = perpetual preference shares and hybrid debtcapital(*In ‘qualifying reserves’ we now include a sharebasedpayments reserve, foreign currency translationreserve and available-for-sale reserve, as we believethis to be correct and appropriate for economic capitalcalculations. These are currently excluded for regulatorycapital purposes.)• Elevated stress and scenario testing to yet a new height inline with new best practice developing over the past year onthe back of the global financial crisis.• Appointed a head for the newly established GroupData Management Office to champion groupwide datagovernance and data quality, following the launch of theGroup Data Project.• Further embedded our economic profit and managing forvalue approaches in the 2010 – 2012 updated business plans131NEDBANK GROUP ANNUAL REPORT 2009GROUP REPORTSOPERATIONAL REVIEWSGOVERNANCE
isk and BALANCE SHEET management reportand day-to-day operational management. Completed thesecond full year of using economic profit driven off riskbasedeconomic capital allocation to determine bonuses(short-term incentives) across the group’s businesses.• Delivered comprehensive, best-practice Pillar 3 publicdisclosure reports and were awarded two prizes at theannual Investment Analysts Society (IAS) Reporting andCommunication Awards. The IAS is the society that most ofthe SA buy- and sell-side analysts and fund managers belongto, and their 2 000 members vote on the awards. The awardscover the 2008 year and are these analysts’ view on theinvestor reporting Nedbank Group disclosed last year.Our awards were:− Award for best reporting and communication.− Overall Best Reporting and Communication Award, whichis the main award (all the winners in each JSE Limitedcategory competed).• Enhanced and cascaded the group-level risk appetite metricsdown to business clusters (see page 135).• Completed, with the assistance of international consultants,‘deep dives’ into the potential risks inherent in:− Commercial real estate portfolio (Property Finance).− Mortgage/home loans portfolio (Nedbank Retail).− Specialised lending portfolio (Nedbank Capital).− Motor vehicle finance (Nedbank Retail and Imperial Bank).• Enhanced the incorporation of risk in the group’s three-yearbusiness planning process for the 2010 – 2012 period via amore formal and comprehensive requirement for each majorbusiness to produce a risk strategy component, integratedwith their business strategy. This is in addition to the grouplevelrisk and capital strategy document produced.• Addressed the Basel Committee’s first response packageto the G20’s eight-point plan released in January 2009,following the meeting in November 2008, benchmarkingthese points against Nedbank Group’s current practice andincorporating any gaps into the SMART Programme.• Despite the difficult international markets, successfully raisedTier 2 subordinated debt in March 2009 in the amount ofUS$100 million and at acceptable pricing levels (LondonInterbank Offered Rate + 150 basis points).• Implementation of new Quantitative Risk Managementsoftware for our asset and liability management process isprogressing well and is due for completion in early 2010.• Ongoing refinement and enhancement of Nedbank Group’sAdvanced Internal Ratings-based credit system and relatedcredit modelling.• And finally, after having invested significantly in a worldclassBasel II risk and capital management environment, weembarked on our programme of managing for value to extractsignificant value for the group from this investment, whileensuring that we continue to improve the underlying data thatdrives financial and non-financial information. This initiativehas further been supported by the implementation of anenhanced financial reporting architecture, which has improvedour target-setting processes, financial management activitiesand external reporting capabilities.In addition there are a number of economic capital allocationmethodology enhancements that will be implemented for 2010,which are expected to have a significant impact on the allocationof capital across the group’s business clusters. The impact of thechanges by business cluster will be disclosed with the30 June 2010 results. The following is a summary of the keyenhancements being implemented for 2010:• Full alignment of the group’s actual book capital with theaggregate amount allocated to the various business clustersusing bottomup economic capital.• Updating of the credit portfolio modelling correlations andcredit economic capital allocation methodology taking intoaccount recent global developments (including downturnyears) and the new regulatory thinking in line with the newBasel III proposals discussed earlier.• Measurement of operational risk for economic capitalpurposes using the Advanced Measurement Approach insteadof the Standardised Approach. We submitted our applicationto use this approach to the SA Reserve Bank in January 2010and await its feedback.Risk appetiteRisk appetite is an articulation and allocation of the risk capacityor quantum of risk Nedbank Group is willing to accept in pursuitof its strategy, duly set and monitored by the Group ExecutiveCommittee and the board, and integrated into our strategy,business, risk and capital plans.We measure and express risk appetite qualitatively and in termsof quantitative risk metrics. The quantitative metrics includeearnings at risk (or earnings volatility) and, related to this, thechance of regulatory insolvency, chance of experiencing a lossand economic capital adequacy. These comprise our group-levelrisk appetite metrics. In addition, a large variety of risk limits,triggers, ratios, mandates, targets and guidelines are in place forall the financial risks (eg credit, market and asset and liabilitymanagement risks).In 2009 we sought to enhance the consolidation, focus andreporting of the key financial risk appetite metrics, and thecascade from group level down to cluster, business unit andmonoline level.132NEDBANK GROUP ANNUAL REPORT 2009
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NEDBANK CAPITAl - Nedbank Group Limited

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